Sino-British Relations The Window of Opportunity

Sino-British Relations: The Window of Opportunity

In Club News by Stephen Perry

Following the use of a well thought through formula agreed with Beijing, the Prime Minister and Foreign Secretary reaffirmed that the UK recognises the sovereignty of China over Tibet. This was re-stated by the Prime Minister on May 7 in Parliament, followed shortly after by the Foreign Secretary, and this was followed by a series of actions which enabled the Dalai Lama saga to move away from confrontation. Some in government still smart from not being able to show the Chinese their teeth, but generally they have recognised that identifying economic growth as their primary medium term task, and affirming that it is to come largely from emerging markets, while having a broken relationship with China, the biggest emerging market by far, was counter-productive.

The Chinese leaders can now feel that the UK has again recognised the sensitivity of the Tibet question and that giving special recognition to the Dalai Lama had undermined the British relationship with China. The British can move on now to focus on the economic potential. And that has poured in during the last few weeks as more and more inward investment deals have been announced.

The key now is to solve the visa blockage, which impedes both Chinese tourist spending and business travel. Theresa May was put in a difficult position on immigration and it has taken 15 years to accept the compromise that I put forward for China in 1998. There are some serious issues but we were throwing the baby out with the bathwater, and that took some time to be properly appreciated. I think this is mainly solved now, and we owe a great deal to people like Martin Barrow of Jardines, who has worked tirelessly on the matter.

So where to now? Clearly, there is a pent up demand for different types of investment by the Chinese in the UK, and that can only become a bigger flow if we have a constructive relationship, even if changed, with Europe.

However, let us also be clear that the investments that are occurring are the result of the Chinese wanting these investments for their own reasons. It is fine, because our interests overlap. The newer and bigger challenges are in the areas of getting China to accept what the British want and requires movement by the Chinese. The Chinese are very skilled at making the foreigner think a deal they wanted is experienced by the foreigner as their achievement, which, it might be, in part.

But the world now consists of two major capitals – Beijing and Washington. The two largest economies of the world representing different interests – the West and the developing nations – will compete and complement each other in unpredictable ways. The interplay between them is going to shape much of the economic and political landscape.

We only have to look at how Jiang Zemin’s Asian tour of 1996, which followed the emergence of overt disputes regarding a number of islands in the South China Sea, has been repeated by Xi and Li in the last seven days, doubtless inaugurating a diplomatic offensive in the region that will continue throughout the next 12 months. These developments occurred while Obama was stuck in Washington, leaving a clearer field for the globally focused Chinese. They are not battling with the USA, but are managing the Asian view of China.

If the British want to develop major new trade and investment relations in Africa, South and Central America, Australia and New Zealand, and the plethora of Oceanic islands, then Britain would benefit from a good relationship with China, who will build their relations strongly with all those areas of the world. Trilateral deals with China in the developing world is one of the best prospects for the UK.

The building of the Chinese modern state towards its interim goal of 2021, as well as the longer term goal of 2049, is going to reveal a very different form of socialism, not so far removed from responsible capitalism, where growth and development are valued– together with caring for the people.

Business in China, will also increasingly be managed by regulators and shareholders, following government and party guidelines, so as to make their policies coherent with the overall use of scarce resources, and the maintenance of a stable and healthy society, which entails balance in the distribution of the proceeds of the developing economy.

The state will have to develop effective plans, and then monitor and manage them with heavy and light touches, with careful use of funding and regulators, whilst keeping its size below 35% of GDP at the maximum, probably nearer to 30%, as compared to our 50% plus.

The state must take responsibility to address and deal with bubbles and irresponsible capitalism quickly. A private sector left to regulate itself does not work, as our recent financial bubble demonstrates all too clearly.

China will produce a revolutionary welfare state, which will be half the size of the western form in terms of percentage of GDP, and will substantially move its obligations onto business as the main creator of the needs, and the best mechanism to maintain efficiency.

Consequently, China will increasingly become the place where the UK and others will need to go to, to learn how to deal with this huge problem which has throttled western governments. China will increasingly privatise the huge cost of hospitals and schools, as it is the affordable service that will be key.

The role of officials will be to ensure quality and efficiency and prevent companies from short changing the workforces on welfare. Much of the world is stuck in a 19th century mind warp of employer versus employee, when over half of the stock exchanges are effectively owned (but crucially not controlled) by the people through pension and other funds.

Increasingly, the big companies are not run by single entrepreneurs – they are there for an early first phase, and increasingly replaced by a managing class, who, in the west, are overpaid and under challenged, in that they only have one hurdle – quarterly profits.

Look for China to redefine their job descriptions. The state will become the last line of welfare not the first. Companies wishing to downsize will need to be creative to find new jobs and not dump the problem on the taxpayer.

In these two areas – responsible shareholders adhering to national plans and a reformed welfare state meeting the needs of the people – it is the Scandinavian and German models that are closer to China’s form, but even they will learn from China.

So the UK has much to gain from China economically (and this will be augmented by China opening itself to more imports through a re-valued and internationalised Renminbi, as well as by greater openness to investors) and can benefit from China’s need to spread its wealth with a view to securing better returns and minimising political risk, along with the development of its core industries into national champions and global leaders. As the Renminbi develops towards a global reserve currency, China will suck in more low cost imports – the clock is turning full circle.

Politically, we also have much to learn around the concept of responsible capitalism, or ‘socialist capitalism’ if you like, to be unveiled in the next few months and years.

Then, as the world’s superpower, the USA, probably turns inwards to a Walmart “buy American” strategy aimed at rebuilding US manufacturing and thereby overcoming its twin deficits.

The challenge for the USA of working with China will be the hardest area of all, as the Americans do not know how to be partners. They only know how to be in charge. But the signs of American change are there now, as they know they can only continue to be powerful if they spend the next 15 years getting their economy reshaped. Let’s hope the hawks do not predominate, as a war to stop the rising developing nations will badly affect us all.

So can the UK help broker peace between them and help them avoid conflict? This is our diplomats’ greatest challenge and the sooner they leave a one-sided preoccupation with human rights behind them and move towards a focus on averting war and building peace, the sooner they will be able to use their historical skills and positions to play a leading role in a reshaping of the world that is unfolding before our eyes.

The end game is not China in charge, but a multipolar world with a global architecture that will enable the world, like contemporary Europe, to avoid any one country being able to run the show. While Germany appears to be in that position, temporarily, in Europe, it knows that the checks and balances created by EU institutions make any such play for supremacy doomed to failure. Thank goodness for the global statesmanship of Mrs Merkel and for her sense of realism in how she plays her economic cards. She understands China and Russia and how to work with them and we need to play catch up there as fast as we can.

We need our Foreign Secretary regularly going backwards and forwards between the main global capitals of Washington, Beijing, Berlin and Moscow. That is where Syria needs to be settled, not by relying on a Sunni alliance to remove Assad. The world needs peace to build prosperity and not regime changes, which usher in chaos and uncertainty. As economic development takes hold, so regimes ease and change. Iraq, Libya and Syria are the old way.

We need to move fast to create the new global institutional ideas that can enable the world to develop peacefully and deal with its challenges of poverty and sustainability while maintaining economic growth and innovation. We need to keep our military defensive capabilities as part of a global force that protects peace.

But the need for the UK to change is immediate and China is the key. We must refocus on the new changes and forces and help the old and new world work together.

Let’s hope 2015 ushers in a clear perspective on the future of the UK taking the best from China and offering back our historical skills, stability and our role as a global financial centre.

This is my take on this window of opportunity bravely opened by Prime Minister Cameron as a result of reflection followed by action.

Stephen Perry


The 48 Group